Gold: Is It Just Another Commodity?

It’s one thing to invest in gold. It’s another to understand the logic of gold in a free economy. You should do both. But understanding the economic logic of is more important than investing in gold.

One of my goals is to make the economics of gold clearer to people. If you don’t understand why I recommend gold as an investment, you may decide to buy gold just because you take my word for it. Don’t do this. Buy gold or gold-related investments such as North American gold shares only when you understand the economics behind gold.

Four decades ago, the Foundation for Economic Education (FEE), published a series of essays that were later assembled into a book, Clichés of Socialism. (It was later updated as Clichés of Politics.) They were standard accusations against the free market. They were wrong-headed, but initially they sounded plausible. One by one, these essays refuted them.

I think it’s worthwhile to assemble a few of the standard clichés against gold, and then offer answers.

Clich #1: "Gold Is Just Another Commodity"

This is the equivalent of saying "Warren Buffett is just another stock market investor." In my day (and, I would argue, still), it would have been like saying, "Sophia Loren is just another woman." Or, in 1990, "Michael Jordan is just another basketball player."

Gold is a commodity. That’s why it has functioned as money for thousands of years. Ludwig von Mises argued in his book, The Theory of Money and Credit (1912) that money is the most marketable commodity. This is another way of saying that money is the most liquid asset.

Liquidity consists of the following:

  1. Instant sale without offering a discount
  2. Instant sale without advertising costs
  3. Instant sale without paying a commission

Historically, gold functioned as money. It no longer does. Gold is not liquid any longer. The general public has gotten used to credit money issued by banks. It is used to pieces of paper with dead politicians’ pictures on them (United States) or live politicians’ pictures (Third World countries), or a missing politician’s picture (Iraq).

But until World War I led to the universal confiscation of depositors’ gold by commercial banks, followed by the gold’s confiscation from the commercial banks by the central banks, gold was money.

Why? Because gold had four crucial characteristics:

  1. Divisibility
  2. Transportability
  3. Recognizability
  4. High value in relation to volume and weight

Silver also possesses these features, but it has lower value in relation to volume and weight. It was used for smaller transactions.

Here is the ultimate fact of gold as money: it is cheaper to print pieces of paper than it is to mine gold. It is easier still to create digits in a computer.


Most other commodities are consumed in use. Gold, in its monetary function, is not consumed. Most of the world’s above-ground gold is in vaults. It is used in exchange, but it is not used up.

Most other commodities wear out. Gold doesn’t. It doesn’t tarnish. An acid, aqua regia, destroys it, but nothing else does. Gold coins and bars at the bottom of the ocean can be salvaged and instantly put back into the economy. There is a ready market for these coins.

Most other commodities are not the objects of nearly universal demand. The Spanish conquistadores found that gold was highly prized by the monarchs of the Indian empires in Mexico and South America.

Most other commodities do not have a "track record" of thousands of years. Gold does. It has been in high demand for as long as societies based on extensive trade have left records.

Most other commodities have not been political metals. Gold has. This is why the Roman emperors put their images and slogans on the empire’s coins.

Nobody says, "it’s as good as copper," let alone "it’s as good as pork bellies."

The Bible says, "And Abram was very rich in cattle, in silver, and in gold" (Genesis 13:2). It did not mention platinum. As for the Bible’s assessment of the value of wisdom,

But where shall wisdom be found? and where is the place of understanding? Man knoweth not the price thereof; neither is it found in the land of the living. The depth saith, It is not in me: and the sea saith, It is not with me. It cannot be gotten for gold, neither shall silver be weighed for the price thereof. It cannot be valued with the gold of Ophir, with the precious onyx, or the sapphire. The gold and the crystal cannot equal it: and the exchange of it shall not be for jewels of fine gold (Job 28:12—17).

Not one reference to soybean oil!


Gold is used as jewelry. It is used for ornaments of great value. It is used in art, especially religious art. It is associated with God in many religions, probably because of the characteristics already mentioned, plus this one: it’s brightness and color. It is associated with the sun, just as silver is associated with the moon.

This explains why gold and silver became money. Both metals were highly valued for reasons other than their use in exchange. They became valuable in exchange because they possessed value prior to their circulation as money. This was the insight of Professor Mises, his "regression theorem" of money. This is why money was created by the market itself, not by kings.

When used as money, gold extended the market across borders. People on both sides of a border desired gold, irrespective of the image on the bar or coin (after 700 B.C.). It could be melted down and re-cast. Someone else’s image could be stamped on it.

Additional voluntary exchanges became possible because there was a ready market for gold. Thus, because gold was not just another commodity, it facilitated the extension of the division of labor. Men’s productivity rose because they could specialize in their work. They got better at whatever it was that they did for a living.


If gold is just another commodity, why do the world’s central bankers use it to settle final accounts? Why aren’t bars of some other commodity stored in the vault of the Federal Reserve Bank of New York? Why didn’t they make "Diehard III" about a heist of, say, hard red winter wheat?

Central bankers don’t trust each other. They know how easy it is to create money out of nothing. They hold dollar-denominated assets, such as U.S. Treasury-bills, because they can earn interest — not much these days — but they settle their final accounts with each other in gold.

If gold were just another commodity, there would be greater flexibility in settling accounts. They could choose a different commodity. But they choose gold. They did throughout the 20th century, even during World War II. That’s why they created the Bank for International Settlements in Basle, Switzerland. Western and Nazi bankers met with each other because each side knew that without a money economy, it could not win the war. Gold is the base of the money economy in international trade.

There is talk about replacing the dollar with some other currency as the unit of account, i.e., the world’s reserve currency. But in the final settlements, gold is the world’s reserve currency. For central bankers gold is money. It has liquidity.


Gold bugs believe that there will be a voluntary return to the use of gold by the general public. The computerized technology now exists to create private money systems based on gold — digital gold. There can be 100% reserve banking. The digits allow us to make exchanges in the range of one dollar’s purchasing power.

This doesn’t mean that the public will necessarily adopt "gold cards," i.e., debit cards in gold — to conduct their common economic affairs. It will probably take a breakdown of the present debt-based monetary system to persuade the average Joe or Mitsuo to make the switch. The problem is, such a breakdown could involve the destruction of the entire credit system and therefore the exchange system, i.e., a vast contraction of the economy, which would drastically shrink the division of labor and with it, specialization of production. This would involve gridlock: Bank A could not settle accounts with Bank B until Banks C and D settled with Bank A. Greenspan calls this disaster "cascading cross defaults."

Perhaps a major country, such as China, will restore currency convertibility into gold. This would surely make China’s currency the world’s new reserve currency. But it would place people at risk, since the government could suspend convertibility at any time. This is what governments invariably do when gold runs begin.

I do not expect a return to a gold coin standard in my lifetime, but I do expect it eventually. The free market can offer a better product than any government can. This is as true of money as it is of any other mass-produced product. The money of preference historically has been a commodity, and gold has been the favored commodity for large transactions. Silver and copper are in second and third place, respectively.


Anyone who says that gold is just another commodity is ignorant of the history of money. He is spouting a cliché, not making an argument.

September 19, 2003

Gary North is the author of Mises on Money. Visit For a free subscription to Gary North’s newsletter on gold, click here.

Gary North Archives